How Do I Hedge Against Stagflation?

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00:00:05.240 | - Welcome back to Portfolio Rescue.

00:00:18.100 | This is our show where we take questions

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00:00:20.720 | Every week our inbox is full of questions from you.

00:00:22.780 | A lot of good ones, sometimes we get them from the chat.

00:00:24.100 | We had a bunch of live people in the chat here today.

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00:00:31.080 | Duncan, it's been a kind of a rough year

00:00:32.660 | for US stocks and bonds.

00:00:34.100 | So John, let's throw up the chart here just to show.

00:00:35.880 | This is a year to date returns for the S&P 500

00:00:38.840 | and the Barclays Aggregate Bond Index.

00:00:42.140 | S&P's down 6% or so.

00:00:44.240 | Bonds actually down worse than stocks right now.

00:00:46.120 | They're also down a little more than 6%.

00:00:49.040 | This is pretty rare.

00:00:49.940 | So I looked back until the 1920s.

00:00:52.400 | When does this happen that stocks and bonds in the US

00:00:54.520 | are down in the same year?

00:00:56.320 | It's happened four times in history since the late 1920s.

00:00:58.360 | 1931, 1941, 1969, and 2018, just barely.

00:01:03.360 | Bonds were down just a smidge.

00:01:06.240 | I actually wrote a eulogy for the 60/40 portfolio

00:01:09.160 | back in 2019 because it's getting killed every year

00:01:11.300 | since 2008 basically.

00:01:12.920 | Is the 60/40 dead, is it dead?

00:01:14.520 | And I always say, if the 60/40 is dead,

00:01:16.720 | that means diversification is dead.

00:01:17.960 | So people say, all right, this year it's really dead, right?

00:01:19.920 | It's gotta be dead.

00:01:21.320 | Well, my counterpoint to this is diversification

00:01:24.600 | might not protect you over days, weeks, months,

00:01:27.440 | or even years, but long-term returns of the owns that matter

00:01:30.480 | and the long-term returns for a 60/40 portfolio

00:01:33.200 | have still been pretty good.

00:01:34.040 | I looked it up today, 60/40 portfolio in the US

00:01:36.120 | over the last 10 years, up 10% per year,

00:01:38.400 | including this year.

00:01:39.440 | - Pretty good.

00:01:40.280 | - I'm sorry, but you don't get 10% a year for a decade

00:01:43.140 | and not expect to see something like this

00:01:44.480 | where you get a 5% drawdown in a few months.

00:01:47.020 | That's how this works.

00:01:47.960 | There has to be the risk of a year like 2022

00:01:50.600 | to get decent returns over the long haul, right?

00:01:52.720 | I think it just has to be this way.

00:01:54.400 | So I don't think that this year

00:01:55.360 | means the markets are broken.

00:01:56.880 | It means we're in kind of a strange environment.

00:01:58.920 | Interest rates are rising

00:02:00.020 | at the same time stocks are falling

00:02:01.280 | and maybe stocks are falling because rates are rising,

00:02:04.320 | but I think this is just the way it has to be.

00:02:06.160 | You have to have this short-term risk

00:02:08.040 | to get the long-term gains over the long-term.

00:02:09.840 | That's how it works.

00:02:10.760 | - Yeah, I mean, your chart that you shared the other day

00:02:12.760 | in an article was what, a savings account

00:02:15.080 | is yielding 0.06% on average or something, yeah.

00:02:18.440 | - Right, yeah, so unfortunately,

00:02:20.400 | with rates still being relatively low, even in bonds,

00:02:25.200 | you're gonna have to accept some volatility

00:02:26.680 | or in returns over the long-term.

00:02:27.640 | That's like the trade-off right now.

00:02:29.800 | All right, let's do our first question here.

00:02:32.360 | - Okay, so up first, we have a short and sweet one.

00:02:35.600 | Is there any way to prep for stagflation?

00:02:37.880 | Any actionable ideas?

00:02:39.400 | - Duncan, do you know what stagflation is?

00:02:43.720 | It's like a bachelor party, right?

00:02:44.800 | - Not well enough to explain it well.

00:02:46.620 | - All right, Larry Summers said this the other day

00:02:50.200 | of social network fame.

00:02:52.840 | The Fed's current policy trajectory

00:02:54.440 | is likely to lead to stagflation

00:02:55.840 | with average unemployment and inflation,

00:02:57.200 | both averaging over 5% over the next few years

00:02:59.840 | and ultimately a major recession.

00:03:01.820 | This is basically the 1970s scenario.

00:03:03.600 | Stagflation is when you have high inflation

00:03:06.440 | mixed with growth that doesn't go so much

00:03:08.760 | in the U.S. economy, right?

00:03:09.840 | So you have sort of a sputtering growth

00:03:12.360 | that doesn't do that much.

00:03:13.200 | You have low growth and you have high inflation, right?

00:03:15.360 | Because most of the time, when you have high inflation,

00:03:17.880 | you have high economic growth.

00:03:18.840 | That's what's happening right now.

00:03:20.000 | A lot of people don't feel that way,

00:03:21.720 | but nominal growth last year in the U.S. economy

00:03:24.400 | before inflation was like 11%, right?

00:03:26.920 | So we had a booming economy,

00:03:28.640 | but we also had high inflation.

00:03:30.100 | Now, the worry is, okay,

00:03:31.920 | that inflation is gonna get so high,

00:03:33.360 | it's gonna impact growth and spending

00:03:35.160 | and growth is gonna come down,

00:03:37.480 | but inflation is still gonna be there.

00:03:38.760 | So again, this is the 1970s, so this is a scenario.

00:03:40.700 | So honestly, the '70s are the only scenario we have here

00:03:44.480 | for an example.

00:03:46.440 | And I wanna show some differences.

00:03:47.640 | First of all, let's look at the inflation in the '70s, John.

00:03:49.440 | That's the first chart.

00:03:51.280 | Throughout the '70s, the average inflation rate

00:03:52.800 | was a little over 7%.

00:03:55.360 | It had also started the decade.

00:03:57.540 | It was already rising in the 1960s at like 5% or 6%.

00:04:00.200 | So it was already pretty high going in.

00:04:02.000 | Now let's look at the 10-year Treasury.

00:04:03.160 | This is the biggest difference between now and then.

00:04:05.680 | The 10-year Treasury averaged almost 8% in the 1970s.

00:04:09.980 | It got as low as five and about as high as 11.

00:04:13.960 | So rates were much, much higher back then than they are now.

00:04:17.540 | Let's look at the Fed funds rate next.

00:04:19.560 | This is the federal funds short-term interest rate.

00:04:22.280 | You see it got as low as 2.25% in the early '70s,

00:04:25.600 | got as high as 17.6% by the end

00:04:28.100 | as they were trying to stave off inflation.

00:04:30.680 | So interest rates were much higher.

00:04:33.180 | Inflation is about what it is right now,

00:04:34.480 | but it was like that for a decade,

00:04:35.720 | whereas we've been using it,

00:04:36.640 | we've been experiencing it for about a year.

00:04:38.360 | So the question is, how do we prepare for it?

00:04:39.800 | If we're thinking about your portfolio,

00:04:41.880 | the easy answer for back then was commodities.

00:04:45.360 | I think that the GSCI index,

00:04:47.560 | which is like the Goldman Sachs Commodity Index,

00:04:49.880 | was up like 20% per year.

00:04:51.600 | Oil was up more than 800% in the '70s.

00:04:54.620 | Gold actually rose more than 1,000%.

00:04:57.160 | Now, I think that has just as much to do with the fact

00:04:59.720 | that Nixon broke that link of turning gold into cash,

00:05:03.000 | that he took that convertibility off the table

00:05:05.400 | in the early 1970s.

00:05:06.240 | I think that has much to do with gold rising

00:05:08.280 | as did the commodities boom,

00:05:09.360 | but that certainly has something to do with it.

00:05:10.520 | So if you look at energy stocks since 2021,

00:05:13.280 | they're up 115%.

00:05:14.800 | So commodities, energy, if we had a stagflation,

00:05:18.080 | that would seem to make sense.

00:05:21.560 | Now, let's look at the earnings real quick

00:05:23.000 | from the '70s, too.

00:05:23.840 | So this is S&P 500 earnings in the 1970s.

00:05:27.640 | Up 160%, it was actually the second biggest decade ever

00:05:32.040 | for earnings, so it was up 9.9% per year.

00:05:34.320 | So corporations did fantastic

00:05:36.300 | because guess what inflation means higher earnings, right?

00:05:39.240 | Obviously, on a nominal basis, when you take out the real,

00:05:41.320 | it's not quite as good because inflation was 7%.

00:05:44.320 | Well, let's look at the returns.

00:05:45.160 | The craziest thing about the '70s,

00:05:46.700 | so I looked at stocks, bonds, and cash.

00:05:48.200 | S&P 500, 10-year treasuries,

00:05:50.740 | and then cash is like three-month T-bills,

00:05:52.240 | which is basically, think about it as a money market account

00:05:55.160 | or a savings account, short-term treasuries.

00:05:57.200 | Stocks were up 6% per year.

00:05:59.480 | This is on a nominal basis before inflation.

00:06:01.280 | Bonds were up 5.4%.

00:06:03.240 | Cash was up 6.3% per year in the '70s.

00:06:06.040 | So holding your money in a savings account

00:06:08.240 | would have given you a better return

00:06:09.560 | than stocks or bonds in the 1970s.

00:06:12.400 | Obviously, that's because rates were much higher back then,

00:06:15.040 | what you were earning on cash,

00:06:16.840 | and short-term T-bills was much higher.

00:06:18.800 | We don't have that now,

00:06:19.640 | but that's the hardest part now,

00:06:21.700 | is that back then you had the high inflation,

00:06:23.100 | but at least you had higher interest rates to help you

00:06:25.220 | and safe assets.

00:06:26.180 | We don't have that today.

00:06:27.660 | Bond rates are still, they've been coming up,

00:06:28.940 | but they're still like 2%, right?

00:06:30.580 | So you don't have that cushion.

00:06:32.180 | That's the biggest difference.

00:06:33.380 | Let's show the value versus inflation one here, John.

00:06:36.140 | So what I did here is I looked at the outperformance

00:06:40.780 | of value versus growth stocks by decade.

00:06:43.020 | And then on the bottom there, you can see,

00:06:44.660 | I plotted inflation.

00:06:45.900 | This might be a little confusing to people,

00:06:47.440 | but the idea is going from left to right.

00:06:49.980 | The higher the value is up until the right,

00:06:51.720 | that means when inflation is high

00:06:53.280 | and value is doing well, value stocks.

00:06:55.580 | And alternatively, the other way,

00:06:58.400 | when inflation is lower in deflation

00:07:00.680 | and value is underperforming growth.

00:07:02.760 | So the 2010s are a prime example.

00:07:05.520 | Inflation was really, really low

00:07:07.800 | and growth outperformed value by a wide margin.

00:07:11.280 | You can see the one at the very top there,

00:07:12.900 | in the 1970s and 1940s, are the two best decades

00:07:15.840 | for value stocks, outperforming growth stocks.

00:07:18.120 | Guess what those two decades have in common?

00:07:20.880 | It was the two highest inflation decades

00:07:22.560 | we've had on record, right?

00:07:24.860 | So if you look at just value and growth this year alone,

00:07:27.880 | now again, we're two and a half or three,

00:07:31.080 | two and a half, three months into the year.

00:07:33.540 | The Vanguard value fund is up 1% this year.

00:07:36.040 | The Vanguard growth fund is down 12%.

00:07:38.480 | Vanguard small cap value is down 2%.

00:07:40.680 | The Vanguard small cap growth fund is down 13%.

00:07:44.000 | So my takeaway from all this is that diversification

00:07:48.760 | probably matters more than ever

00:07:50.840 | when you have these changing

00:07:51.920 | economic environments like this, right?

00:07:54.040 | In the 2010s, everyone just said,

00:07:55.280 | "Why don't I just own all tech stocks?

00:07:57.000 | "And that's gonna make my life easy."

00:07:58.520 | Tech stocks are getting crushed now

00:07:59.740 | because growth is not doing as well,

00:08:01.280 | 'cause inflation is higher, that favors value stocks.

00:08:03.820 | So if we did have a period where growth came in a little bit

00:08:06.480 | but inflation stayed high, you would expect

00:08:09.120 | that much broader diversification would help you

00:08:12.360 | than being narrowly focused on any one sector.

00:08:14.400 | And then obviously, if you had all your money in commodities

00:08:16.320 | and inflation continues to stay high, you'd probably do okay.

00:08:18.640 | But that's the idea.

00:08:19.480 | I think diversification now matters more than it ever has.

00:08:22.640 | - Yeah, it's a huge shift, too,

00:08:23.760 | to go from just caring about revenue growth

00:08:26.160 | and things like that to commodities, right?

00:08:29.440 | How do you gauge something like that?

00:08:33.360 | - It is bizarre because we've gone from this shift

00:08:35.200 | from digital is the only thing that matters

00:08:37.380 | and software and metaverse to,

00:08:39.280 | oh, I forgot, real world stuff actually matters.

00:08:41.800 | Commodities, these real inputs, and then supply chains

00:08:44.880 | and all the stuff that moving stuff around,

00:08:46.280 | that stuff still matters.

00:08:47.240 | The physical world still matters.

00:08:48.740 | And I think that this last 18 months or so

00:08:50.640 | has been a pretty good reminder of that.

00:08:52.120 | - Yeah, definitely.

00:08:53.280 | - But I saw stagflation, it's a scary-sounding word, right?

00:08:57.480 | You hear that. - Very scary, yeah.

00:08:58.720 | - It doesn't, like global warming,

00:09:00.680 | actually, that's like the worst PR campaign of all time

00:09:03.960 | 'cause it sounds nice.

00:09:05.440 | - Yeah. - Like stagflation is--

00:09:06.280 | - Should have been called climate catastrophe

00:09:07.880 | or something like that. - Yeah, something bad.

00:09:09.120 | But yeah, stagflation does not sound good

00:09:11.840 | and it's not great either.

00:09:12.720 | So, all right, let's do the next one.

00:09:14.240 | - Okay.

00:09:15.080 | Up next we have, how do you find a balance

00:09:18.720 | between having a spiderweb of accounts for every purpose,

00:09:21.520 | house, down payment, fund, savings, living,

00:09:24.280 | giving, emergency fund, et cetera,

00:09:26.540 | and having everything go into one checking account

00:09:28.720 | with monthly ACHs to the final destinations?

00:09:32.720 | Is there a specific system that you suggest

00:09:34.640 | to start with when it comes to automating your finances?

00:09:37.400 | I could use this one.

00:09:38.240 | I feel like I have, like, way too many accounts.

00:09:40.560 | - All right, yeah, I think that's a problem for everyone

00:09:42.320 | because there are so many,

00:09:43.920 | it's so much easier to have accounts these days

00:09:45.480 | 'cause there's all these different investing platforms

00:09:47.840 | and things to do, so people tend to dabble.

00:09:50.400 | John, put up the little chart here of my system

00:09:53.080 | that I created a couple years ago.

00:09:54.080 | I showed this in a blog post a while ago.

00:09:56.840 | The easiest, I do use my checking account as the hub.

00:09:59.040 | The only thing that comes off the top is 401(k)

00:10:00.800 | and my wife had a 403(b) plan.

00:10:03.240 | That would go off right before you even see it

00:10:05.040 | and that makes it easier, I think.

00:10:06.240 | But the other stuff, it's all automated

00:10:08.440 | and the checking account acts as the big hub

00:10:10.440 | and that's where all the different stuff comes out of.

00:10:13.280 | I don't know if it really matters all that much.

00:10:15.680 | It depends how much you can automate.

00:10:17.800 | And the great thing about these different accounts these days

00:10:20.280 | is that you have the ability to set this stuff on autopilot.

00:10:23.560 | But I think the places that you start

00:10:26.400 | are things like taking your credit card balance

00:10:28.960 | and paying it off in full each month.

00:10:30.280 | You can set that in an automatic checkbox.

00:10:32.560 | I'm gonna pay it off in full each month

00:10:33.720 | so you're not paying interest and extra stuff on there.

00:10:37.240 | I think the bill pay automatically is easy

00:10:39.760 | so that's either through the bank

00:10:40.760 | or recurring payments at the companies.

00:10:42.120 | So hopefully you can do that for your mortgage or rent,

00:10:44.160 | your utilities, subscriptions, car payments,

00:10:46.000 | insurance, phone, cable, all that stuff.

00:10:47.520 | For me, that's all on autopilot.

00:10:49.080 | I never wanna think about it.

00:10:50.480 | It's great because that means you don't pay interest

00:10:52.960 | to credit cards, which is really high

00:10:54.840 | and can just punch you in the face.

00:10:57.640 | You don't have to deal with late payments

00:10:59.520 | and overdrafts and all this stuff.

00:11:00.640 | - Yeah, talk about interest rates that never change.

00:11:03.320 | Like 29.9% APR on a credit card.

00:11:06.600 | - Yes, I saw a news story the other day saying,

00:11:09.240 | the Fed's raising rates,

00:11:10.080 | this is gonna impact your credit cards.

00:11:11.200 | It's like, guess what?

00:11:12.040 | Rates came down, credit card rates never came down.

00:11:13.760 | Those ones are set in stone basically.

00:11:15.360 | Yeah, they don't.

00:11:16.400 | The other thing, I have automated charitable contributions.

00:11:19.000 | We're gonna talk about those a little bit later today,

00:11:20.560 | I know, but I mentioned this on the compounded friends

00:11:22.520 | a few months ago, but charities love it

00:11:24.820 | when you have this set up on autopilot

00:11:27.000 | so they can plan their budgets out a little better.

00:11:29.480 | I also think that one of the things you can do automatically

00:11:32.320 | is save for infrequent purchases

00:11:34.240 | that you know will happen on occasion, right?

00:11:36.280 | So things like car repairs,

00:11:37.760 | you know they're gonna happen at some point,

00:11:38.960 | you don't know when, you don't really know the magnitude.

00:11:41.240 | So you can set up an automatic deposit

00:11:43.960 | from your checking account to go into online savings

00:11:46.840 | that for 50 bucks a month to cover a car payment,

00:11:49.600 | that car repair payments, you know it's gonna happen.

00:11:52.960 | I think a lot of it just depends

00:11:55.080 | like how psychologically important it is

00:11:57.160 | for you to have that one hub

00:11:58.320 | versus having a bunch of different accounts

00:11:59.600 | and putting them together using something like Mint.

00:12:01.960 | I just think that the automation thing is key

00:12:05.400 | because having to worry about all that

00:12:07.200 | and write a check for everything

00:12:08.640 | or track down and pay each bill each month,

00:12:10.520 | it's gonna be easy to forget and miss some of those.

00:12:13.420 | So something that's simple for us is,

00:12:15.240 | I mentioned this before, I think my wife had like a $50

00:12:17.880 | coming right out of her paycheck to a Disney fund.

00:12:20.400 | She set it up like three years in advance

00:12:22.120 | 'cause she knew where we were going.

00:12:23.500 | I do think the great thing about a 401k or a 403,

00:12:26.440 | like a workplace retirement account

00:12:27.880 | is that it never hits your account in the first place.

00:12:30.240 | You never have to see that money hitting your account

00:12:31.840 | and then see it go back out.

00:12:33.360 | I think for some people that like loss aversion

00:12:35.120 | type of thing, seeing the money leave is harder.

00:12:37.320 | So the fact that you never see it, I think that makes sense.

00:12:39.900 | But the other thing is I treat savings like a bill payment.

00:12:43.440 | So if it's the 529 for my kids

00:12:46.240 | or for some people it's an HSA or the 401k,

00:12:49.500 | I think if you treat that like a bill payment

00:12:51.000 | and assume it's just not gonna be there,

00:12:52.120 | that helps you figure out your spending

00:12:53.520 | on the backend a little easier

00:12:54.800 | and you just kind of let that stuff go and don't touch it.

00:12:56.640 | And as long as it's automatic,

00:12:58.200 | it makes it easier to not worry about it.

00:13:00.000 | And you think, okay, this is a bill

00:13:01.040 | that's gonna be paid each month.

00:13:01.880 | I'm not having to worry about it.

00:13:03.480 | - At what point do you think Disney will allow people

00:13:05.280 | to pull money out before taxes on their paychecks?

00:13:10.280 | - I can't believe they haven't gotten to the point

00:13:12.920 | where people are fighting back yet.

00:13:14.520 | It's still the busiest place on earth.

00:13:16.480 | And yeah, their inflation has got to be doubled

00:13:19.920 | the average for the country, easily.

00:13:22.560 | - Yeah, seems like it based on animal spirits.

00:13:25.240 | You guys discussed that.

00:13:26.160 | - And one more thing, I think once you do automate

00:13:28.360 | all this stuff, it probably makes sense

00:13:29.880 | to at least check it like once a year

00:13:31.620 | because you could have subscriptions you're paying

00:13:33.120 | for magazines or gyms or streaming services

00:13:37.080 | that you don't use anymore.

00:13:38.080 | So I think it makes, and for them, that's perfect.

00:13:40.280 | That's recurring revenue.

00:13:41.120 | That's what they hope for, right?

00:13:42.160 | I have a Planet Fitness gym by me

00:13:44.700 | and it's 10 bucks a month.

00:13:45.540 | And I always think, how in the hell

00:13:47.600 | does this business model work?

00:13:48.680 | And oh yeah, it works because people sign up for it.

00:13:50.640 | It's automatically taken from their checking account.

00:13:52.560 | And then a lot of them just never go.

00:13:54.600 | And it just takes that out all the time.

00:13:56.020 | So it makes sense to at least review this stuff,

00:13:58.360 | I'd say, on an annual basis.

00:13:59.820 | - Cool, good advice.

00:14:02.480 | - All right, let's do another one.

00:14:03.720 | - Okay, question three is, as a single 34-year-old male

00:14:07.160 | with about $500,000 in net worth,

00:14:09.560 | should I be looking into establishing a living trust?

00:14:12.360 | I have no idea what this means,

00:14:13.440 | so I'm looking forward to this one.

00:14:15.160 | I have no kids or wife and no major concerns

00:14:18.040 | of passing on my wealth other than the beneficiaries

00:14:20.540 | assigned to my accounts.

00:14:21.800 | If I were to start one, what should I expect to pay

00:14:23.880 | for a living trust in California or just in general?

00:14:27.220 | - Duncan, Portfolio Rescue is great for you

00:14:28.900 | 'cause I feel like at least once a week

00:14:30.220 | there's a question where you say,

00:14:31.060 | I don't know what this is.

00:14:31.900 | - Yeah, all the time. - Right, it's perfect.

00:14:33.040 | So I am not a trust expert,

00:14:35.540 | but we do have a trust expert on our team here.

00:14:37.180 | Let's bring Taylor Hollis in.

00:14:38.640 | She is one of the newest members

00:14:40.700 | of Richardson Wealth Management.

00:14:41.940 | - Hey, Taylor.

00:14:42.780 | - Hello. - An advisor

00:14:43.600 | just came to us from Nashville.

00:14:45.100 | Taylor has worked with trust in her career.

00:14:46.860 | So first of all, before we get into like,

00:14:49.460 | does this person really need one, tell us what is a trust?

00:14:52.540 | What are some of the reasons that someone would look

00:14:54.240 | to have one and what the benefits are?

00:14:56.160 | - Yeah, so I think trust a lot of times

00:14:59.300 | get kind of a smoke and mirrors reputation.

00:15:01.980 | So I'll kind of boil it down.

00:15:03.360 | I think in simplest terms,

00:15:05.200 | I like to think of a trust as a box.

00:15:07.440 | So it's literally just a separate entity

00:15:10.240 | that you can put assets in.

00:15:12.940 | And sometimes it's its own separate tax reporting entity.

00:15:19.000 | Sometimes it's files back to your own personal tax return.

00:15:23.000 | In the case of the living trust,

00:15:24.760 | they're asking about in the question,

00:15:26.760 | that's also known as a revocable trust,

00:15:29.160 | which is essentially just an extension of yourself.

00:15:32.360 | So as long as you are serving as the trustee

00:15:34.800 | of your revocable or living trust,

00:15:37.640 | then it'll flow through back to your tax return.

00:15:40.420 | And it's one entity as far as the IRS

00:15:43.000 | and the government's concerned.

00:15:44.040 | - So what is the protection you're looking for

00:15:45.520 | by setting up a trust?

00:15:46.460 | Like what are you trying to protect your money from?

00:15:49.100 | - So talking about a revocable trust,

00:15:52.660 | which is what his question is, or a living trust,

00:15:54.660 | is kind of different than talking

00:15:55.820 | about an irrevocable trust.

00:15:58.300 | If you're setting up an irrevocable trust,

00:16:00.380 | you're typically trying to protect from creditors,

00:16:04.580 | potentially future ex-spouses,

00:16:08.380 | just future kind of family concerns

00:16:11.380 | that might be on the horizon.

00:16:12.900 | But with a revocable trust that he's asking about,

00:16:15.500 | I think the main benefits to setting that up

00:16:18.620 | are that when you pass away, you bypass probate.

00:16:23.320 | So probate is the term for the court proceedings

00:16:28.320 | that your estate has to go through when you die.

00:16:32.420 | So when you pass away, you have all your assets,

00:16:35.480 | investment accounts, maybe a house, those kinds of things.

00:16:37.920 | And it, under normal circumstances,

00:16:40.300 | has to go through this probate process through a court.

00:16:44.460 | And so, but by setting up a revocable or living trust,

00:16:48.460 | that is totally bypassed and everything goes

00:16:51.620 | according to how you've designated it

00:16:54.240 | in the trust document.

00:16:55.300 | - It's not as messy, right?

00:16:56.780 | - Not as messy.

00:16:57.860 | Not as messy, not as much of a burden

00:16:59.780 | on your family members that are likely settling your estate.

00:17:04.180 | And another main benefit to setting up a revocable trust

00:17:07.380 | is privacy.

00:17:08.560 | That's something a lot of people like about it.

00:17:11.620 | Whether it's if you buy a home

00:17:13.700 | and you put it in the name of the trust,

00:17:15.380 | not everyone can see that John Smith bought this house.

00:17:19.700 | It might just be the Smith Living Trust

00:17:22.340 | and they don't know exactly who it was.

00:17:24.580 | It's also, from a privacy standpoint,

00:17:26.500 | beneficial for your heirs who's inheriting your assets

00:17:29.940 | because maybe you don't want everyone to know

00:17:33.260 | that your son or daughter inherited a million dollars

00:17:36.980 | when you passed away.

00:17:37.980 | And if your estate goes through probate through a will,

00:17:43.020 | that's all public record.

00:17:44.180 | So anyone can walk up to the courthouse

00:17:46.340 | and look up wills and look up probate proceedings.

00:17:49.180 | - So how about this example

00:17:50.020 | where we have a 34-year-old single male, no kids.

00:17:53.420 | 'Cause I've heard examples in the past of life insurance

00:17:55.740 | and I've had friends who were single at the time

00:17:57.140 | and they said, "Hey, someone's trying

00:17:57.980 | "to get me to buy life insurance."

00:17:58.820 | And I said, "You're single, what does it matter?"

00:18:00.740 | Does that same apply for a trust

00:18:03.420 | or do you think there are cases where this makes sense

00:18:05.200 | to just make it easier and pass it along

00:18:07.820 | if something should happen to them?

00:18:09.360 | - Yeah, I don't think in this particular case

00:18:12.500 | it's absolutely necessary.

00:18:15.620 | But I do think that if it's something

00:18:17.940 | that they're thinking about,

00:18:19.580 | setting it up now will only make their life easier

00:18:22.380 | in the future.

00:18:23.420 | So he mentioned he doesn't own any real estate,

00:18:26.900 | but when the time comes,

00:18:28.220 | if you're planning on purchasing a house,

00:18:30.820 | you already have that revocable trust set up

00:18:33.380 | and you can just buy the house in the name of the trust

00:18:35.540 | instead of having to quit claim the deed later on

00:18:38.800 | and so on and so forth.

00:18:40.020 | So it still gives you full control over your assets,

00:18:43.460 | even though you don't have kids,

00:18:45.180 | but it still would give you control

00:18:48.260 | to say who those assets go to

00:18:50.260 | if something untimely happened at such a young age.

00:18:53.780 | So again, I don't think it's absolutely necessary,

00:18:56.940 | but you're definitely not going to harm anything

00:18:59.040 | by setting it up now and just having it in place for future.

00:19:02.660 | - Are trusts set up in old English in the 1700s?

00:19:05.020 | Because I feel like revocable and irrevocable

00:19:06.700 | are words that I would stumble over all the time

00:19:08.900 | and I would have a hard time spelling

00:19:09.980 | every time I had to do it.

00:19:11.300 | - Yes, yes.

00:19:12.180 | And they sound so much alike

00:19:13.660 | that it's easy to misunderstand.

00:19:16.580 | I think they actually date back to the medieval ages,

00:19:18.900 | but that's for a different episode.

00:19:20.500 | We don't need to go there.

00:19:21.340 | - It seems intentionally confusing.

00:19:23.420 | - Yes.

00:19:24.260 | - All right, let's do another one.

00:19:25.620 | - Okay.

00:19:26.780 | So last but not least, we have,

00:19:29.280 | I'd appreciate some insight on donor advised funds or DAFs.

00:19:32.780 | Considering all of the donations

00:19:34.380 | going to a crisis right now,

00:19:35.620 | this seems like a good opportunity to go over what they are

00:19:38.260 | and the pros and cons.

00:19:39.460 | I'm looking to donate 50 to 100 bucks a month

00:19:42.060 | towards a charity, but first I wanted to learn about DAFs.

00:19:45.420 | - I think this is the second question

00:19:46.580 | we've gotten on this in as many weeks,

00:19:48.160 | which is good to see.

00:19:49.000 | People are trying to get back and figure out ways to do it.

00:19:51.460 | So first of all, Taylor, we'll go over

00:19:53.780 | what is a donor advised fund, when it makes sense,

00:19:56.300 | and then what are some of the potential benefits

00:19:58.380 | and when it doesn't make sense.

00:20:00.380 | - Yeah, so donor advised fund,

00:20:02.820 | actually kind of similar to a trust, is a separate entity.

00:20:06.380 | So it's a charitable giving vehicle

00:20:09.460 | that individuals or married couples can set up

00:20:13.480 | to fund their charitable intentions out of.

00:20:16.480 | Some people might be familiar with foundations.

00:20:19.900 | Those are kind of on a typically a grander scale.

00:20:23.780 | Donor advised funds, I like to think of

00:20:25.280 | as just a simplified foundation.

00:20:27.800 | And I think they really came about in popularity

00:20:34.100 | after the 2017 Tax Cuts and Jobs Act passed

00:20:37.220 | because that significantly increased

00:20:40.580 | the standard deduction amount,

00:20:42.620 | and which is good for a lot of folks,

00:20:45.420 | but it raised the threshold of charitable donations

00:20:50.420 | and their benefit to you from a tax standpoint.

00:20:53.780 | So donor advised funds became very popular out of that

00:20:57.000 | because you have the ability to,

00:20:59.620 | what I call bunch donations.

00:21:01.940 | So you're essentially pre-funding your charitable giving.

00:21:05.020 | So instead of giving away $10,000 each year

00:21:10.020 | because there's not a huge benefit to you

00:21:13.560 | from a tax standpoint of that

00:21:15.820 | 'cause you're still under that standard deduction,

00:21:17.940 | but you can instead one year decide to put $50,000,

00:21:22.940 | call it, into a donor advised fund,

00:21:26.140 | you get a much more significant tax deduction by doing that,

00:21:29.340 | and you've essentially pre-funded

00:21:31.260 | all your future charitable gifting.

00:21:32.820 | So then going forward, you can gift charitably

00:21:36.100 | out of this donor advised fund.

00:21:38.120 | - And it seems like these are the type of funds too

00:21:39.820 | where people will donate a mutual fund

00:21:42.540 | or a stock or something like that, right?

00:21:43.700 | Where it's a lot of times

00:21:44.540 | you're donating securities into these things.

00:21:45.860 | How does that work?

00:21:46.820 | - Right, right.

00:21:47.660 | So if you own securities with a very low cost basis,

00:21:52.340 | a lot of times there's a kind of double tax advantage

00:21:56.340 | to donating that to your donor advised fund

00:21:58.700 | because A, you get the deduction for the charitable gift,

00:22:03.020 | but also you're not having to recognize those gains

00:22:06.900 | on your personal return, right?

00:22:09.420 | So you're avoiding gains

00:22:11.020 | and getting a deduction at the same time.

00:22:12.540 | So a lot of times those appreciated securities

00:22:14.500 | are a great option to put into the DAF.

00:22:17.180 | - What do we think, Duncan?

00:22:18.020 | You got it now?

00:22:19.140 | - I think so.

00:22:19.980 | I'm seeing a lot of people didn't know what they are,

00:22:21.820 | so it makes me feel better that, you know,

00:22:23.860 | I just learned about these last week, so.

00:22:25.900 | - It is one of these things

00:22:26.860 | that seems like this secret little thing

00:22:28.260 | if you'd ever heard about it,

00:22:29.180 | but again, I think it's a great thing.

00:22:31.060 | People are thinking about more intelligent ways to give,

00:22:33.460 | and this seems like one that makes a lot of sense

00:22:34.820 | for people, especially if you have some securities

00:22:37.100 | that you're willing to donate, right?

00:22:38.580 | - Right, right.

00:22:39.420 | And I like to, it's a good idea to be strategic about it.

00:22:42.220 | So if you have a big income year,

00:22:43.940 | let's say you sell, you know, investment property

00:22:48.100 | or you just make a lot of money one year,

00:22:49.620 | it's a great option to try to look at funding a DAF

00:22:53.380 | in that same year to help offset some of that income

00:22:55.660 | from a tax standpoint.

00:22:57.340 | - And this is like,

00:22:58.180 | we talked about with Bill last week, Duncan, right?

00:22:59.260 | Like, when does it make sense to have a tax advisor

00:23:01.900 | or someone that's looking this stuff over for you

00:23:03.620 | when you don't know this stuff and you need real help?

00:23:05.700 | - Yeah, exactly.

00:23:06.540 | Yeah, this kind of stuff, it seems, yeah, so complicated,

00:23:09.580 | pretty hard to do on your own.

00:23:11.140 | - Right.

00:23:11.980 | Okay. - Yep.

00:23:12.820 | - I think that's all the questions for this week.

00:23:13.640 | Thanks to Taylor.

00:23:14.860 | - Yeah. - Taylor.

00:23:15.700 | - Thanks for having me. - Thanks, Taylor.

00:23:16.520 | - Welcome to Riddholtz.

00:23:18.020 | You've been here for four weeks now.

00:23:19.660 | - Four weeks.

00:23:20.580 | - Yep, and already on Portfolio Rescue.

00:23:21.700 | Good job. - Here we are.

00:23:22.620 | - Everyone keep those questions and comments coming.

00:23:25.120 | We have a new "Compound & Friends" tomorrow going up,

00:23:27.680 | right, Duncan?

00:23:28.600 | - Yes, we have Nick Kolas on.

00:23:31.000 | - Oh, very good, from Data Trek.

00:23:32.320 | Yeah, his research is always good.

00:23:34.720 | We'll have a new "Animal Spirits."

00:23:36.320 | We have a new one coming Saturday,

00:23:38.040 | discussing some NFTs that Duncan actually helped us create,

00:23:41.040 | which are pretty cool.

00:23:42.360 | And it's also gonna be a charitable component there.

00:23:44.880 | We'll have a new one Monday and Wednesday as well.

00:23:46.360 | And then, what are your thoughts on Tuesday?

00:23:47.560 | So thanks, everyone, for tuning in.

00:23:48.800 | As always, send us your questions.

00:23:50.820 | Askthecompoundshow@gmail.com,

00:23:52.560 | and we will see you next week.

00:23:53.920 | - Thanks, everyone.

00:23:55.020 | (upbeat music)

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00:24:03.020 | (upbeat music continues)

00:24:06.440 | (upbeat music)

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